Broadband Provider Faces FCA Liability for Fraudulently Procuring Stimulus Funds

Posted by Kristin Graham Koehler and Samuel M. Singer

A federal judge has refused to dismiss a False Claims Act suit against a Missouri telecommunications company accused of fraudulently procuring a federal stimulus grant for providing broadband services in underserved areas. The case, Schell v. Bluebird Media LLC (W.D. Mo. June 28, 2013), provides further evidence that the False Claims Act (“FCA”) is playing an important role in rooting out fraud in the procurement of economic stimulus funds.

In Schell, Bluebird Network LLC (“Bluebird”), a Missouri-based broadband provider, faces allegations that it fraudulently procured a three-year, $45 million federal stimulus grant for broadband services. Administered by the National Telecommunications and Information Administration, the broadband program is part of the American Reinvestment and Recovery Act (“ARRA”) and aims to provide broadband internet services to underserved rural areas across the United States. Bluebird procured a grant for the purpose of constructing and operating a fiber optics cable network in northern Missouri.

The relator is Steven Schell, the former vice president of operations at Bluebird, and one of the key managers of the northern Missouri project. Schell alleges that Bluebird fraudulently procured the stimulus grant by misrepresenting its eligibility for the program. Among other things, Schell alleges that Bluebird exaggerated the need for broadband in the area the company proposed to service, misrepresented the company’s access to matching funds, and falsely claimed that it could create a viable business model. With respect to the first allegation, according to Schell, the “underserved” area targeted by Bluebird is actually saturated with service providers and covered by a 3,000-mile fiber optics network “that weaves in and out of the 59 counties” in the proposed territory. Schell also claims that Bluebird fired him, in violation of the FCA’s anti-retaliation provisions, when he objected to the company’s misrepresentations.

Bluebird moved to dismiss the action, arguing that Schell’s complaint was conclusory and lacking in detail. Bluebird argued that because Schell had not defined “underserved” or specified who made the alleged misrepresentations, the court had no plausible basis for concluding that the company’s statements were false, much less knowingly false. The Court disagreed. “Contrary to defendant’s argument,” the Court explained, “Schell does not need to provide a legal argument for what constitutes “under-served” at this stage of the pleadings or go into detail about who made the statement or which companies provided the services.” Schell, 12-cv-04019, at 7. The Court concluded that Schell’s complaint was sufficient, even under the heightened pleading requirements in Rule 9(b), to state a plausible claim for fraud.

When Congress enacted ARRA, it was with the expectation that the FCA would help the government keep a tight rein on the $800 billion stimulus package by deterring waste and abuse. In 2010, FCA recoveries under ARRA, the Troubled Asset Relief Program, and other economic stimulus funds constituted 11 percent of the government’s recoveries, totaling roughly $327 million in settlements and judgments. As awarded funds continue to circulate through the economy, and as new stimulus money goes out the door, FCA lawsuits should be expected to continue apace.